Page 120 - MYM 2016

Pricing and the CEO
The furniture company Ikea, airline companySouthwest and discount retail chain Aldi are
all examples of companies that have a pro table low-price position from Day 1.
rush of a price war seem irresistible. But they are delusions which have nothing to do with a low-price position. e best cure I have found for these delu- sions is a cultural one. Don’t start price wars. Don’t ght them. Don’t engage in over-the-top discounting which teaches customers – both in B2C and B2B markets – to buy cleverly on price and price alone.
e second caveat comes from my dear friend and mentor, the late Peter Drucker, who once told me that low prices and high pro ts rarely come together. at combination only occurs when a com- pany has a clear, signi cant, and sustainable – o en extreme – cost advantage over its competitors. e choice of the price position a ects the overall busi- ness model, the product quality, branding, and how to innovate. It also determines which market seg- ments the company will serve and what channels it will use to reach them.
When the combination of low prices and high pro ts does occur, it means companies have relied on seven decisive success factors:
1. They have a low-price position from day 1: all successful low-price companies have focused on low prices and high volumes from the very beginning. In many cases, they created radically new business models. Successful transformations from a premium position to a low-price one are extremely rare, though I will provide one example below.
2. They have a high-growth, high-revenue focus. is creates economies of scale which they exploit to the greatest extent possible.
3. They are extremely e cient: they oper-
ate with extreme cost and process e ciency, which enables them to enjoy good margins and pro ts even while charging low prices. ey are procurement
champions, tough but fair on supplier prices and terms. e German-based Aldi retail chain and the Swedish furniture company IKEA are masters at this.
4. They guarantee adequate and consis- tent quality: low prices can never o set poor and inconsistent quality, at least not over a long period. Sustainable success requires only adequate quality, but you must deliver it consistently.
5. They focus on core products: they do noth- ing that isn’t absolutely required by the customer. at saves costs, without jeopardizing value creation.
6. Their communication focuses on price:
To the extent they even advertise at all, they focus almost exclusively on price. Please see Aldi, its German competitor Lidl, the low-cost airline Ryanair, and the latest “Transfarency” campaign from Southwest in the US, which goes: “Low fares. Nothing to hide. We’re all about being open and honest with Customers and making sure pesky fees stay away from our low fares” (http://www.trans- farency.com).
7. They never mix their messages: almost all of the successful “low price – high pro t” companies stick to an “every day low price” or EDLP strategy rather than a “hi-lo” which relies on frequent tempo- rary promotions.
Marketing is a formidable challenge for com- panies with a low-price position. eir hard work di ers from the classic marketing e orts of premium and luxury goods companies, who combine attrac- tive design, high performance, and high quality with elaborate packaging and aspirational advertisements. e art of marketing for low-price companies lies
in understanding precisely what a customer needs and wants, at what level of quality, and perhaps more
120 | MINd YOUr MarkETING OCTOBEr 2016